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9 Apr, 2024
By Ranina Sanglap and Marissa Ramos
Indonesia's biggest banks could see their earnings growth start to slow in the coming years due to an expected fall in interest rates, in turn putting pressure on net interest margins.
The Southeast Asian nation's economic growth supported lenders' asset quality and performance in 2023, while lower credit costs also bolstered profitability. But headwinds have started to emerge.
The country's four biggest banks by assets — PT Bank Mandiri (Persero) Tbk, PT Bank Rakyat Indonesia (Persero) Tbk, PT Bank Central Asia Tbk and PT Bank Negara Indonesia (Persero) Tbk — are expected to see year-over-year increases in net income for 2024 and 2025, though the pace of growth will likely slow.
Bank Mandiri's 2024 net income, for example, is expected to come in at 58.38 trillion Indonesian rupiah, up from 55.06 trillion rupiah in 2023, an increase of a little over 6%, according to data compiled by S&P Global Market Intelligence. This compares to the nearly 34% growth in net income between 2022 and 2023, and the nearly 47% increase from 2021 to 2022, the data shows.
In the case of Bank Rakyat, net income growth is expected to hit 66.47 billion rupiah in 2024 from 60.10 billion rupiah in 2023 — an increase of 10.6%. This was against an approximate 17% in net income growth between 2022 and 2023, and a little under under 65% between 2021 and 2022.
"A significant risk to net profit stems from the possibility of Bank Indonesia rate cuts in the latter half of 2024, which could lead to slowing interest income," analysts from Bank Central Asia wrote in their 2024 banking outlook report released in December 2023, adding: "In 2023, banking industry enjoyed high profit from higher rates, but it is unlikely to happen again in 2024."
Rising exports supported Indonesia's economy, which grew 5.05% in 2023. Bank Indonesia expects the economy to grow between 4.7% and 5.5% in 2024, helped by export performance and domestic demand, the central bank said in its Feb. 21 monetary policy statement. Bank Indonesia Governor Perry Warjiyo flagged the possibility of rate cuts in the second half of this year, The Jakarta Post reported.
The direction the US Federal Reserve takes would play a big part on the outlook for Indonesian banks, Bank Central Asia analysts noted. Prolonged high interest rates could impact liquidity or asset quality, while a rate decrease could disrupt profitability by crimping margins, they said. Fed officials have flagged rate cuts this year, but continued strength in the jobs market has prompted analyst commentary that the US central bank will be in no rush
Lending rates in Indonesia have remained flattish despite rate hikes, as banks find it difficult to pass higher rates to corporates while smaller companies might struggle to absorb higher costs, S&P Global Ratings credit analyst Ivan Tan wrote in a November 2023 global banks outlook report. As such, the country's banks do not always grow their net interest margins as rates rise and previous tightening cycles actually compressed margins.
"We project a [100-basis-point] reduction in policy rates, which we believe will lead to interest margin expansion as funding costs recede faster than sticky lending rates," Tan said.
Indonesian banks have flagged rising costs due to elevated interest rates. Bank Rakyat said that regulations, rising interest rates and higher system competition for funding in 2023 led to a rise in its cost of funding to over 3%. In the first half of 2024, the lender is cautious about funding costs, it said in its full-year financial update presentation Jan. 31. Bank Mandiri also acknowledged cost of funds pressure amid seasonally strong loan growth.
"Liquidity has been tight over the past 24 months, and it doesn't seem to get any better. Consequently, this has driven up funding costs across banks. And this is likely to persist into 2025," Nomura analysts wrote in an April 1 note. "In our view, banks would need to reprice their lending rates to mitigate declining net interest income."
As of April 9, US$1 was equivalent to 15,869.00 Indonesian rupiah.